The credit card giants won this battle, but CFIB won’t give up the fight

As the news broke that the Competition Tribunal had rejected the case against Visa and MasterCard, several dozen reporters asked for my comments on the impact to small and medium-sized merchants in Canada. The decision meant that Visa and MasterCard rules forcing merchants to accept all types of their cards, regardless of the cost, were maintained. It also meant merchants could not add surcharges to consumer purchases made with Visa and MasterCard.

The Competition Tribunal’s decision on Tuesday to throw out the case against credit card companies was a blow to the retail industry, but it’s only a matter of time before Canada goes the way of Australia, the U.S. and much of Europe by permitting merchants to directly pass on the cost of accepting credit cards to consumers.

On the surface, the decision was a big win for the big credit card brands. The powers CFIB and the Competition Bureau had been seeking were designed to provide bargaining clout to the merchants. Merchants feel powerless in their ability to keep rising credit card merchant fees in check. Most told me that they had no plans to surcharge or turn down more expensive card types, but we felt that just having the power to do so would cause Visa and MasterCard to rethink future rate hikes. In the case of Interac debit, merchants have always had the power to surcharge but few ever do as debit costs in Canada remain low.

Consumers may feel the recent decision is a victory for them. But what they don’t know is they are already paying these giant fees. The 2% to 3% of every sale Visa and MasterCard and their partners in the banks pocket, translates into $5-billion to $7-billion in merchant fees a year that are embedded in the prices consumers pay. And, cash and Interac consumers are also paying for card holders’ “free” trip to Paris.

While the full details of the decision have not been released, a further read of its summary may cause credit card companies to one day wish the Tribunal had given the win to merchants. The Tribunal reported that as a result of the rule prohibiting surcharges, “there had been an adverse effect on competition” and recommended a regulatory framework, instead.

While small businesses are regulated down to the free cups of coffee they provide to customers (sadly a real example), the credit card industry is virtually unregulated in Canada.

We are fortunate Finance Minister Jim Flaherty worked with the Canadian Federation of Independent Business on a Code of Conduct for the Credit and Debit Card Industry. This voluntary code was adopted by all industry players and has served as ground rules to address some of the worst practices. It helped ensure Interac remains a viable competitor in the payments industry. But the code has not helped reduce pressure on credit card merchant fees witnessed by recent across the board rate hikes by Visa and MasterCard.

A growing list of countries has moved to a regulatory solution to address the problems in their credit card industries. The European Union is considering a cap on interchange rates — the main driver of credit card fees — for merchants and consumers. Australia has not only capped rates, but also allows merchants to surcharge.

Regulation often has some perverse effects, though. In the U.S., a regulatory solution was imposed because of the sky-high debit fees merchants had to pay. It capped fees at 24¢ per transaction (versus 5¢ paid by Canadian small merchants who are members of CFIB). While this helped bring down costs for large transactions, reports indicate that the cost for smaller purchases actually went up as the industry raised prices to the maximum allowable. For small businesses, a cap may have actually meant that their total debit fees increased.

While regulation often has unintended consequences, merchants rightly want to see quick action to address the ongoing lack of transparency, high and continually rising fees and the feeling of powerlessness in their relationship with the credit card industry and the banks.

If the credit card industry was smart, it would immediately set to work with merchants to see how these concerns can be addressed before the hand of government intrudes. I suspect Visa, MasterCard and the banks would like a regulatory solution, such as price capping, a lot less than addressing some of the concerns of small business owners.

There are times when we’ve managed to work with the industry and government to address some challenges, such as recent rules changes to address some terrible practices by several Independent Sales Organizations who used separate leases to trap small businesses into bad deals.

I’m not terribly optimistic that the credit card industry will heed the call to return some balance to its relationship with merchants on its own. I would be delighted to be proved wrong. But on behalf of the 109,000 small and medium-sized business members who choose to be part of CFIB each year, I am committed to putting all options on the table to address these important issues.

Dan Kelly is president of the Canadian Federation of Independent Business and lead spokesman and advocate for the views of CFIB’s 109,000 small and medium-sized member businesses across Canada. Follow Dan on Twitter @CFIB and learn more about CFIB at www.cfib.ca.